Withholding Does Not Equal Tax
In JLK Rosenberger’s more than 10 years of working with professional athletes, the following is a summary of the main issues they face when it comes to owing tax:
- Bonus withholding trap – The IRS rule on bonuses is to withhold 25% up to the first $1 million. Thus, a big bonus could see you needing to make up for possibly as much as 15% of $1 million!
- Multiple sources of income not withheld – This includes sources such as investments, self-employment income, rental income, and marketing/royalties/endorsements. No tax is withheld throughout the year for these items. You either pay with your tax return or via estimates throughout the year.
- Spouse with income – Even if you are properly withheld, if filing jointly, your spouse’s income is combined with yours. This may result in a higher tax bracket than the standard withholding tables indicate.
- Multiple employers – If you have five different employers each paying you $20,000, each of those salaries will be withheld at a very low rate, which will likely mean you are under-withheld. Whereas if you have just one employer paying you $100,000, you are more likely to be properly withheld. For example, if an NFL player bounces around to a couple of teams during training camp and then lands with a squad for the regular season, they have worked for three teams in one year. If someone is not watching out for withholding, this player may be in for a surprise.
Why the confusion between withholding and actual tax owed?
What is Withholding?
Withholding is the amount of an employee’s wages taken out of their paycheck. It is sent directly to the local, state, and federal tax powers and is paid throughout the year. It is a prepayment of your tax liability through your paycheck.
What Withholding is not
Withholding is NOT your taxes for the year. Just because your employer takes taxes out of your paycheck does not mean you may not owe more when you file your income taxes. Withholding is also not your income tax filing; you still will need to file your income tax return.
What does it affect?
Withholding reduces the amount of tax an employee will have to pay in April every year. If you are over-withheld, you will get a refund. Under-withheld, and you’ll be writing a check to the government.
What can you do?
Planning is critical to avoid Tax Day surprises. During the off-season, pro athletes generally have very little to no income coming in. Pro athletes should know if they will owe tax in order to have time to set aside necessary funds. Or, in a scenario where they choose to be under-withheld, avoid underpayment of estimate penalties (generally, at least 90% of your tax for current year is supposed to be paid in by the end of the year). Know this: when it comes to withholding, none of this is “true” tax savings. Getting a check back from the government is not money in your pocket you didn’t have before or would not have had otherwise.
Proper tax planning is a year-round process accounting for all the athlete’s sources of income, including income generated off the field. It’s a comprehensive process requiring knowledge of tax rules and regulations, but also the nuances specific to professional athletes. If you have questions about withholdings or need assistance with other tax concerns, JLK Rosenberger has the experience to help. For additional information, call us at 949-860-9892 or click here to contact us.